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Do Not Go Naked Into That Good Night

August 5, 2011 – Naked licensing may sound pretty kinky – licentious even, if you'll pardon the pun – but for trademark owners it can spell disaster.

Witness the case of Eva's Bridal, a family-operated bridal shop in the Chicago area whose owners, Said and Nancy Ghusein, licensed its name and marks to another family member, Nayef Ghusein, for $75,000 a year. The license agreement expired in 2002. Nayef stopped paying royalties but continued to operate the store under the Eva's Bridal name.

In 2007, Said and Nancy sued Nayef under the Lanham Act, contending that he had violated the statute by using the "Eva's Bridal" mark without payment. The court dismissed the suit, ruling that the plaintiffs had abandoned the "Eva's Bridal" mark by engaging in naked licensing – or "allowing others to use the mark without exercising 'reasonable control over the nature and quality of the goods, services, or business on which the (mark) is used by the licensee.'" (The language cited by the court comes from a legal treatise called the Restatement (Third) of Unfair Competition.)

It's a point that a lot of brand owners forget at their peril. Unless a licensor maintains real control over the quality of the products sold to the public under its marks, it risks a finding that it abandoned the marks.

Indeed, on appeal (http://caselaw.findlaw.com/us-7th-circuit/1566867.html), the plaintiffs conceded that a licensor must supervise to ensure quality control. But they argued that because they never doubted the high standards of Nayef, they had no reason to superintend any aspect of his business.

The appeals court rejected that argument. "This argument that licensors may relinquish all control of licensees that operate 'high quality' businesses misunderstands what judicial decisions and the Restatement mean when they speak about 'quality,'" the court stated.

Rather, the court said, the kind of supervision contemplated under the law is the sort that produces consistent quality, not necessarily high quality. "Kentucky Fried Chicken is a valid mark . . . though neither that chain nor any other fast-food franchise receives a star (or even a mention) in the Guide Michelin," Judge Frank Easterbrook wryly noted.

The lesson for licensors, then, is to exercise genuine control over the quality of goods or services provided under their marks. Since many of our insureds are licensors of trademarks and other intellectual property, we thought this would be useful information to include in their risk management program. A licensor's failure to properly police its mark could leave the licensor, ahem, stripped of one of its most important assets – its brand name.